commodity futures contract
the commodity futures contract - a contract on purchase / sale of certain assets (goods), which is subject to obligatory standardization, and delivery date of which is clearly defined. Like any other contract, the commodity futures contract contains a price, but the full value of the asset is paid in the day of delivery. But the exchange rules, the seller and the buyer is obliged to pay a certain amount of money, which will serve as a guarantee for the fulfillment of the obligations assumed by: seller warrants that will put the asset(goods) in the period, the buyer ensures that will pay for the contract on the delivery day. This Deposit is called the margin, and usually does not exceed 10% of the real value of the contract.
Futures contracts freely reversible and may be exchanged only through public auction on official stock exchanges.
On the exchange traded two kinds of the commodity futures contract: contracts with physical delivery, and contracts providing for payment in cash.
Bought on the stock exchange deliverable commodity futures contract, the buyer undertakes to accept and pay for the period stated in the contract quantity of goods. At the time of purchase of the futures contract, the buyer is legally becomes the owner of the goods. The seller of a futures contract, in its turn, undertakes to deliver the goods in the declared time and in the stated in the contract quantity.
As the statistics show, the actual delivery of the ends of not more than 2% of all prisoners of futures contracts. This is explained by the fact that the exchange is allowed to resell the purchased earlier contract, thereby, to transfer ownership of the asset (goods) of this contract to another market participant.
Let us consider an example:
Melnik bought from a Farmer in the beginning of March, the futures contract on wheat with delivery in June, at $5 per bushel. Because of the earthquake/fire/flood/etc. in April, Miller is deprived of the opportunity to fulfill their contractual obligations. By signing a new futures contract on the sale of the same amount of wheat in the same period, the Miller transfers all its rights to wheat and all its contractual obligations to a third person. In case if at the moment of conclusion of a contract for the sale price was higher than the original, then, in addition, that Melnik get rid of the duties, he can obtain and profit.
In the real market, few speculators have the ability and desire to take 3000 bushels of wheat or 100,000 pounds of sugar. Therefore, the majority of futures speculators are trying to get rid of contracts prior to the day of delivery.
In spite of the fact that so little of prisoners of futures contracts end in the actual delivery of, the condition of delivery is required. This is explained by the fact that buyers and sellers are given the opportunity to make or take delivery of the inventory of the goods, if they need it. In addition, conditions of real delivery helps market participants to correctly assess the futures on the cash market. This means that at the moment of delivery of the goods, the price of the futures and the futures market should coincide or be very close. Approximation of prices occurs to the extent that, as a futures contract is close to the delivery date. Otherwise investors would buy at a cheap and would sell a more expensive market, until the price is not agreed to.
Cash settlement futures contracts differ by the fact, that at the end of the term of the contract is cash settlement, but not the delivery. On the last day of trading in these contracts the quoted price is taken as the equal to the cash price of the underlying asset, is the clearing and then close all open contracts.
